“Trump 2.0 might be even more complicated than the first time, because the guy is more radical, the world is more focused on public finance sustainability,” said Gilles Moëc, chief economist at Axa Investment Managers, during a presentation in Luxembourg in mid-December.
Impossible for the Fed to cut, much more than what they've already done
Moëc commented that AxaIM growth forecast for the US is “quite significantly above consensus for 2025 (2.3% vs 1.8%), but we reverse it in 2026 (1.5% vs 2.0%).” He thinks that the US economy will continue to surf on its resiliency but “the toxicity of some aspects of [Trump’s] platform would trigger a slowdown in the US economy.”
Inflation to remain a core topic 2025
AxaIM expects US inflation to be sticky at 2.8% in 2025 and 3.2% in 2026, after having observed a reacceleration of inflation on a three-month basis. Besides, two policies do not bode well for inflation. First, tariffs will have adverse effects on prices. Moëc believes that a programme of mass deportations will not happen. However, Trump may be more successful in reducing the flow of newcomers to the US labour market, resulting into a reacceleration of wages.
“That would make it impossible for the Fed to cut, much more than what they've already done.” Under all of AxaIM’s scenarios, “inflation never converges back to 2%.” During the presentation, Moëc expected the cut that took place on 18 December 2024 and expected another cut in late 1Q25. Besides, he does not expect rates to move up in the back end of 2025 should inflation prove to be sticky as Fed rates are still in restrictive territory. “The neutral rate is somewhere around 3%.”
Budget: any adult in the room?
Moëc noted that the Congressional Budget Office, a nonpartisan US government body, predicts deficits of around 6% for the foreseeable future before accounting for Trump’s policies, which he expects could add 2% of extra deficit.
He expects two unsurprising consequences. First, it will lift growth further. Second, it will result into more debt issuance, “which may have a bearing on long-term interest rates.”
Questioned by Paperjam about a , referring to the short stint of a previous prime minister in the UK over an expansionary budget, Moëc answered that such a development is highly unlikely in the US.
He is confident that the selection of John Thune, “a traditional Republican,” as leader of the Republicans in the Senate should prevent “completely irresponsible budgets to go through.” He believes that the , a “very expensive” programme designed without caps will be repealed, a positive development to regain control over expenses.
Bond vigilantes playing their role
Whereas a competitor for AxaIM is alerted by Moëc noted that signals concerns by the market on debt sustainability and ultimately, default. He observed that CDS levels largely explain the difference between the US yields prediction of AxaIM’s model and the actual direction of US treasury yields.